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Korea faces highest inflation rates amid negative growth concerns

Korea faces highest inflation rates amid negative growth concerns

Posted July. 06, 2022 08:09,   

Updated July. 06, 2022 08:09


Statistics Korea announced Tuesday that the inflation rate last month climbed 6 percent, the highest in 23 years and seven months, increasing household burdens amid rising food and oil prices. Higher interest rates could cause Korea's third quarter GDP of the year to retract by 2.2 percent from last year and plunge into negative growth, according to Nomura Holdings. Impacts from the Ukraine war and supply chain disruption are affecting the Korean economy.

The Korean economy is currently facing multiple challenges of high inflation, job shortage and recession. Korea's misery index, in which inflation and unemployment rates are reflected, reached 10.6 in the first quarter, the highest since 2015. More agony on individuals and businesses results in less consumption, causing unemployment to increase.

The problem is that there is no policy solution to help us escape this vicious cycle. A rise in interest rates is inevitable to curb inflation, which may, however, cause the economy to retract even further. We are faced with a dilemma. We are concerned about capital flight caused by U.S. interest rate increase, but we cannot afford to increase interest rates significantly given household debts of more than 1,800 trillion won. Foreign reserves, using up dollars to keep exchange rates manageable, have gone down to the lowest point since the Asian financial crisis. Despite such efforts, the dollar to Korean won exchange rates exceeded 1,300 won on Tuesday for the first time in 13 years.

These challenges are occurring across multiple regions throughout the world, making it more difficult to cope. In the US, inflation rate as of last month skyrocketed to the highest point in 41 years, driving lower income families that cannot afford to pay rent to move out of their homes and live in motels. Europe is facing an energy crisis with Russia cutting off natural gas supply. Protests were held in the U.K. demanding for higher wages. When the impacts of the global recession hit Korea, which is already struggling with its own problems, the results could be devastating.

The coupling effects of high inflation and low growth is likely to carry on for the longer term. The authorities predict that inflation in the second half might reach 7 to 8 percent, with the economic situation likely to worsen. The government should take all possible policy measures to overcome the situation. However, government efforts alone will not be enough to overcome the economic blow that is likened to the Asian financial crisis. Businesses should slow the rate of reflecting material price increase in consumer prices while individuals should take a step back from demanding wage increase. Economic subjects giving in would be away to alleviate the burden we face.